17 June 2024: There will be no pre-election rate cut

17 June 2024: There will be no pre-election rate cut


  • No rate cut is expected this week
  • Trump’s campaign casts a massive shadow
  • The French crisis may lead to contagion
GBP – Market Commentary

Inflation and wage concerns are still driving the Bank of England

The Bank of England’s Monetary Policy Committee meets later this week for its final chance to provide Rishi Sunak with a morale-boosting interest rate cut. However, Sunak and his Conservative colleagues are set to be disappointed, since inflation and wage increases are still too high for a rate cut to be considered.

Wage growth has been an issue for the MPC since the turn of the year, even as inflation has been controlled.

In May average wage increases were 5.9% unchanged from April.

Data due to be released later this week is expected to show that inflation fell to 3.5% in May, down from 3.9% a month earlier.

Analysts predict that it will be September before the first-rate cut happens. After the excitement of the economy exiting the mild recession that happened during the last two quarters of 2023, there was disappointment when it was revealed that GDP flatlined in the first three months of this year.

The Office for National Statistics Expects growth this year to be 0.6%. Even following a Labour victory in the election, growth is predicted to remain subdued as the new policies will take only a short time to take effect.

Starmer will have at least the rest of this year to be able to blame the “Conservative legacy” for any delay in improving the economy. Although he confidently says that he and his Ministers will begin work on day one, the Labour manifesto promises are unlikely to fill voters with confidence of an immediate upturn in the country’s fortunes.

Although Sunak tried to say that the economy had “turned a corner” since January, the data failed to warrant his belief.

With the election a little over two weeks away, Sunak looks like a beaten man. His appearance at the G7 conference last week would have given him a certain amount of relief from the constant flow of negativity that he has faced since calling the election.

The demeanour of the two main Party leaders could not be more of a contrast. While Sir Keir Starmer exudes a degree of confidence that is entirely justified by the latest opinion polls, Sunak must fight to ensure that the Conservatives at least remain the Party of Opposition on July 5th.

Last week, Sterling fell to a low of 1.2657, having rallied to a high of 1.2860 as the level of volatility increased. It eventually closed at 1.2682. Against the Euro, the pound fared far better, skiing its gift consecutive higher weekly close. It reached a high of 1.1909 and closed at 1.1852.

USD – Market Commentary

It is a slim possibility, but the next move could be a hike

Although the economy is still performing better than expected with interest rates at two-decade highs, there are growing concerns that the Fed cannot control inflation.

It is no longer sufficient for the FOMC to leave rates unchanged in the hope that, eventually, inflation will fall far closer to its target of 2%.

Either Jerome Powell is going to “move the goalposts” and change the target to between 2.5% and 3% or a rate hike may have to be considered with all the ramifications such a move would bring for the economy.

The confidence that Powell showed in the early Spring that the economy would see a soft landing where rising economic growth would be paired with falling inflation seems now to be little more than a pipe dream.

Forward-looking indicators like Business and consumer confidence are beginning to turn lower. Powell must be able to keep consumers onside since that is the primary sector that has driven the recovery post-pandemic.

As inflationary pressures appear to be easing, the potential implications for The implication for Biden are being refocused.

There is little doubt that Donald Trump, despite the crushing defeat of the guilty verdict in his recent trial for false accounting, is going to attack Biden’s economic record at every turn between now and November.

It may well be that, economically, the peak performance arrived about six to nine months too soon for Biden. It is expected that the Fed will be faced with little opportunity but to cut rates come November.

Although this may provide a boost to Biden’s campaign, underlying that will be the fact that the Fed was left with little opportunity since growth may well be faltering, in contrast with most of this year, where Powell and his colleagues were able to be sanguine about when a cut would take place.

Although Minneapolis Fed President, Neel Kashkari, spoke recently of Americans’ dislike of inflation, likening it to European “hatred” of rising prices, the truth is that the American “man in the street” craves both a soft landing and rising employment.

Retail sales data for May is due to be published tomorrow. This is expected to show continued growth, reflecting consumer’s willingness to give the Fed the benefit of the doubt over inflation.

Retail sales are predicted to have risen by 0.3% in May, after seeing no growth in April.

The dollar index has rallied significantly since the ECB announced its cut in interest rates. The rally has not been linear, which shows the market’s expectation that the Fed may be forced to cut rates as soon as September.

The Greenback rallied to a high of 105.80 last week, closing at 105.52.

EUR – Market Commentary

French Government debt is out of control

The “big two” economies of the Eurozone may both be relying on global sporting events to “save them” this year.

The beginning of the Euro ‘24 football tournament in Germany is expected to see the German economy benefit exponentially from its team’s progress, although the number of supporters attending from the 24 nations competing has exceeded expectations the continued participation of The home nation, as well as England, France, Spain and Italy will be crucial.

In contrast, the Paris Olympics will take place against a background of political upheaval in the nation’s capital, although the result of the snap election called by Emmanuel Macron will be known and digested by the time the event takes place.

Recent opinion polls show a rise for both left and right-wing parties, with Macron’s Centrist Renaissance Party struggling to gain ground.

It was announced last week that the French budget deficit ballooned to 5.5% in 2023 and is expected to only fall marginally to 4.9% in both this year and next.

This is a severe blow to Emmanuel Macron, who has seen the cost of French government borrowing rise to well over 3% in the past week.

Despite starting to lower borrowing costs, European Central Bank interest rates will not go further down in a linear path and the central bank could at times wait for more than one meeting before cutting them again, ECB president Christine Lagarde said.

Lagarde lamented developments in global trade in a speech last week in which she targeted China and the United States as well as other emerging nations.

We have rules that are the WTO rules and if all countries could respect the rules and resist tweaks and turns and violations here and exceptions there and subsidies here, it would all be much better for the world economy. I am concerned that we are seeing more and more violations of the rules, Lagarde said.

The Eurozone has seen its share of global trade dwindle as Chinese-produced products have grown in quality, challenging the traditional European standard.

Lagarde and Ursula von der Leyen both want the Eurozone to be a significant trading block and are striving to increase intra-member trade, which has been “disappointing.” Brexit has also had a significant effect.

This week will see the publication of inflation data for May. Headline inflation has “bottomed out” at around 2.5%, meaning that the next cut in interest rate may be several meetings away, as Lagarde warned.

The Euro has lost ground since the rate cut was announced, but not to as large a degree as the market had been fearing. It fell to a low of 1.0667 last week but rallied a little to close at 1.0705.

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.